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Management reiterated FY12 guidance of topline growth of 22-25% and EPS of Rs21.5-22.0,
factoring in margin expansion and a 35-40% growth in the products business and continued
account mining in large financial services clients
Confident of meeting FY12 revenue guidance
Polaris had guided for 22-25% US$ topline growth in FY12 during 4Q?1 results.
Management reiterated that it remains on course to meet the guidance.
The guidance incorporates 40% growth in the products business, which management
believes is not challenging, given the recent large deal wins, particularly the US$55m Reserve
Bank of India deal, which it has started executing.
Management believes the services business can grow at 18-20%, primarily due to client
mining potential in many of its large accounts.
Intellect business prospects are looking better after the RBI win
Management spoke of the RBI deal as a major landmark for the Polaris, as it was its first
major core banking win after a multi-stage evaluation process, in which global Tier-1 product
vendors participated.
Management believes the deal opens up the Indian banking products market for Polaris,
where its footprint is quite small. In addition, Polaris is bidding for 3 other core banking deals,
where it believes the RBI deal win strengthens its case.
The product business funnel has grown to US$360m at the end of 4Q11. Deal sizes of US$5-
10m have now become common, while a year ago most large deals were in the US$3-5m
range.
We currently forecast 46% growth in the Intellect business in FY12, which is higher than
management guidance of 40%. We believe this is achievable in the context of the recently
won large deals and a strong funnel of deals, with improving deal sizes.
Mining of existing accounts should drive growth in the services business
Management believes its current revenue base even for most of its largest accounts as a
proportion of the client's overall IT budget is still in low single digits in most cases, and hence
has room to grow.
Polaris is ramping up its sales team to address these opportunities. It currently has 259 sales
headcount (which includes 40-50 hires in 4Q11) versus c90 people 3 years back.
Management expects operating margins to improve in FY12
Polaris expects operating margins to improve in FY12 by 150bp (including hedging
gains/losses). This builds in operating leverage in the products business, where it does not
plan to add significant headcount despite targeting a 40% growth target.
Management spoke of 3-4 large account renewals in July, where it expects pricing increases.
In addition management spoke of cost of living linked increases in some other contracts,
which were not being accepted earlier.
In addition, management believes there is some scope for improvement in utilization, despite
it being near the higher end of historical range, as it sees room for more resource optimization
in its offshore bench.
We currently forecast operating margin (including fx) to dip by 60bp in FY12. This builds in flat
pricing in 1HFY11 and a modest 25bp qoq improvement in 2HFY11 and FY11 utilization of
79.6%, 100bp lower than 4q11 levels. Hence, there potential upside to our margin forecast, if
execution on utilization and pricing improvements are better than expected.
Cheap valuations on FY12, shifting business mix should drive upside
Polaris currently trades at 8.9x FY12F EPS, near the lower end of its mid cap peer group
valuations
We believe these valuations do not reflect the growing contribution of the products business,
at 22% of revenues and 39% of EBITDA (including fx) in FY11.
We expect increasing contribution of the products business backed by large deal
announcements to drive the re-rating of the stock over the next few quarters.
Our PT of Rs231 values the stock at 11x FY12F EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Management reiterated FY12 guidance of topline growth of 22-25% and EPS of Rs21.5-22.0,
factoring in margin expansion and a 35-40% growth in the products business and continued
account mining in large financial services clients
Confident of meeting FY12 revenue guidance
Polaris had guided for 22-25% US$ topline growth in FY12 during 4Q?1 results.
Management reiterated that it remains on course to meet the guidance.
The guidance incorporates 40% growth in the products business, which management
believes is not challenging, given the recent large deal wins, particularly the US$55m Reserve
Bank of India deal, which it has started executing.
Management believes the services business can grow at 18-20%, primarily due to client
mining potential in many of its large accounts.
Intellect business prospects are looking better after the RBI win
Management spoke of the RBI deal as a major landmark for the Polaris, as it was its first
major core banking win after a multi-stage evaluation process, in which global Tier-1 product
vendors participated.
Management believes the deal opens up the Indian banking products market for Polaris,
where its footprint is quite small. In addition, Polaris is bidding for 3 other core banking deals,
where it believes the RBI deal win strengthens its case.
The product business funnel has grown to US$360m at the end of 4Q11. Deal sizes of US$5-
10m have now become common, while a year ago most large deals were in the US$3-5m
range.
We currently forecast 46% growth in the Intellect business in FY12, which is higher than
management guidance of 40%. We believe this is achievable in the context of the recently
won large deals and a strong funnel of deals, with improving deal sizes.
Mining of existing accounts should drive growth in the services business
Management believes its current revenue base even for most of its largest accounts as a
proportion of the client's overall IT budget is still in low single digits in most cases, and hence
has room to grow.
Polaris is ramping up its sales team to address these opportunities. It currently has 259 sales
headcount (which includes 40-50 hires in 4Q11) versus c90 people 3 years back.
Management expects operating margins to improve in FY12
Polaris expects operating margins to improve in FY12 by 150bp (including hedging
gains/losses). This builds in operating leverage in the products business, where it does not
plan to add significant headcount despite targeting a 40% growth target.
Management spoke of 3-4 large account renewals in July, where it expects pricing increases.
In addition management spoke of cost of living linked increases in some other contracts,
which were not being accepted earlier.
In addition, management believes there is some scope for improvement in utilization, despite
it being near the higher end of historical range, as it sees room for more resource optimization
in its offshore bench.
We currently forecast operating margin (including fx) to dip by 60bp in FY12. This builds in flat
pricing in 1HFY11 and a modest 25bp qoq improvement in 2HFY11 and FY11 utilization of
79.6%, 100bp lower than 4q11 levels. Hence, there potential upside to our margin forecast, if
execution on utilization and pricing improvements are better than expected.
Cheap valuations on FY12, shifting business mix should drive upside
Polaris currently trades at 8.9x FY12F EPS, near the lower end of its mid cap peer group
valuations
We believe these valuations do not reflect the growing contribution of the products business,
at 22% of revenues and 39% of EBITDA (including fx) in FY11.
We expect increasing contribution of the products business backed by large deal
announcements to drive the re-rating of the stock over the next few quarters.
Our PT of Rs231 values the stock at 11x FY12F EPS.
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